Inequality

[Admiral Yi]

Then you were not reading carefully enough.

Also, I am not just talking about the periold before the meltdown.  I am also talking about the period when these things were first introduced which coincided or at least closely followed deregulation in the early 80s.

That's a possiblity.  Can you refresh my memory on some of the complex, difficult to understand derivatives that were created in this time frame?

[crazy canuck]

Even if Oex was sitting in a board room in the 90s...

Why are you writing in such belittling way?

Because first you say that there was no accountability, then you qualify accountability to mean that nobody in the room could help themselves because they were all self reinforcing high flyers in a closed club.

Its nonsense.

These kinds of socialogical explanations ignore the fact that there were some very smart well meaning people that simply got it wrong - not because they were members of some "high flying" elite club.  But because that is what everyone thought was the best practice back in the day.

[crazy canuck]

Then you were not reading carefully enough.

Also, I am not just talking about the periold before the meltdown.  I am also talking about the period when these things were first introduced which coincided or at least closely followed deregulation in the early 80s.

That's a possiblity.  Can you refresh my memory on some of the complex, difficult to understand derivatives that were created in this time frame?

No, you can go through the multitude of articles on the subject.

[crazy canuck]

Derivatives used by large companies are either to hedge risk or (less often) to speculate: either way they aren't naive consumers. These are strategies they seek to employ.

One can be more sophisticated then merely naive and still get fooled by a financial product you think you understand but really dont.  If the subprime market taught us anything it is at least that.

[Admiral Yi]

The fact that a financial instrument was mispriced is not proof of its confusing complexity.  There's nothing at all confusing or complex about the various instruments used to own gold.

[crazy canuck]

The fact that a financial instrument was mispriced is not proof of its confusing complexity. 

the Economist disagrees.

Complexity is a further worry. Richard Bookstaber, who headed market-risk management at Morgan Stanley, says that "complexity cloaks catastrophe". Clients—even supposedly sophisticated ones—do not always understand the risks they are taking on. That's their lookout, you might say, so long as traders do not defraud them and so long as bankrupted clients do not have to be bailed out by the state.

But regulators do have an interest in complexity. It makes valuation difficult: dealers often allocate different values to the same contract. This in turn makes financial accounts more opaque. (Remember Enron.) And the popularity of arcane derivatives has been sustained by "less than lofty purposes", says Mr Bookstaber. For example, under the Basel capital-adequacy rules, when a bank makes a loan to an ordinary company it has to set aside 8% of the loan's value as capital. But for loans to other banks the charge is only 1.6%, because the rules assume banks are more creditworthy. The less they must put aside, the more banks can lend and the more money they can make. This is where CDSs come in handy. A bank overexposed to airlines can use CDSs to share credit risk with other banks and slash the cost of holding the loan. Buying a CDS from AIG, which had a high credit rating, gave banks a similar deal. No wonder they were so eager.

for the full article

http://www.economist.com/node/14843667

[Valmy]

The fact that a financial instrument was mispriced is not proof of its confusing complexity.  There's nothing at all confusing or complex about the various instruments used to own gold.

So all those financial institutions understood these products were seriously flawed and invested all their clients money in them anyway?  I guess it was a swindle then.  And it was a suicide swindle as they intentionally took themselves down at the same time.

[Admiral Yi]

The fact that a financial instrument was mispriced is not proof of its confusing complexity. 

the Economist disagrees.

I doubt it.  And they certainly don't mention it in the article you linked.

[crazy canuck]

The fact that a financial instrument was mispriced is not proof of its confusing complexity. 

the Economist disagrees.

I doubt it.  And they certainly don't mention it in the article you linked.

I cant wait to hear the Yi interpretation of this then

"[complexity] makes valuation difficult: dealers often allocate different values to the same contract. This in turn makes financial accounts more opaque. (Remember Enron.)"

[Admiral Yi]

So all those financial institutions understood these products were seriously flawed and invested all their clients money in them anyway?  I guess it was a swindle then.  And it was a suicide swindle as they intentionally took themselves down at the same time.

They understood how they worked.  That's not the same as knowing if they're priced correctly.  There is no veil of mystery surrounding sovereign bonds, but many turned out to be crap.  Stocks are even less of a mystery but people went all in durinig the dot.com bubble anyway.

[Oexmelin]

Because first you say that their was no accountability, then you qualify accountability to mean that nobody in the room could help themselves because they were all self reinforcing high flyers in a closed club.

If you are taking it this way, I won't bother engaging this issue, and probably others, with you. Too bad. And if you'd rather have it in a belittling way, I'd suggest you reread what I have written, for you obviously have not understood a single word, so eager were you to pour the image of the vociferous misguided leftist into whatever I wrote. (hint 1: some words, like accountability, have shifting meanings - it is therefore good practice to define them in order to foster intelligibility; hint 2: you can find research on the effect of social networks on compensation, firing for unethical behaviour, CEO accountability in such leftist venues as the Journal of Financial Economics, to name but one). 

[Admiral Yi]

I cant wait to hear the Yi interpretation of this then

"[complexity] makes valuation difficult: dealers often allocate different values to the same contract. This in turn makes financial accounts more opaque. (Remember Enron.)"

I'm really baffled that you somehow think an Economist claim about the existence of complexity refutes my statement that misvaluation is not proof complexity.

[crazy canuck]

They understood how they worked.  That's not the same as knowing if they're priced correctly.  There is no veil of mystery surrounding sovereign bonds, but many turned out to be crap.  Stocks are even less of a mystery but people went all in durinig the dot.com bubble anyway.

I will take what Richard Bookstaber says about complexity masking risk over your assertion that "they" understood.

[Admiral Yi]

I will take what Richard Bookstaber says about complexity masking risk over your assertion that "they" understood.

I'll just have to add that to my long list of disappointments in life.

[Valmy]

They understood how they worked.  That's not the same as knowing if they're priced correctly.  There is no veil of mystery surrounding sovereign bonds, but many turned out to be crap.  Stocks are even less of a mystery but people went all in durinig the dot.com bubble anyway.

A financial group understands where are risks involved with stocks and sovereign bonds and you can lose money.  But it is a well understood risk with centuries of history behind it and that is why you diversify your portfolio when fund managing.  The situation regarding the derivatives suggests for some reason they did not understand the risks they were taking on at all.

Are you actually telling me that only complex financial products lose money?  Because LOL